With a euro zone update on Greece unfolding (they might lease some islands but we’ll get to that in a moment), here is some Greek math that Michael Lewis presents in Boomerang.
Referring to the deficit, during October 2009, the Greek government thought it was 3.7% of GDP. A closer look from a new finance minister soon resulted in a revision to 14%. How could they have been so wrong (assuming the new figure is valid)? They actually had no independent group gathering statistics. Instead, the political party in charge managed the math.
The 2009 Greek deficit (spending minus revenue for one year) was close to 14% of GDP. The Greek debt (the total amount they owed) might have been 114% of GDP. Why could the Greeks borrow so much?
Comparing Greece’s GDP to its deficit is sort of like comparing your income to your mortgage and then having a wealthy uncle who would guarantee what you borrowed. After the Greeks joined the euro zone, their borrowing costs plunged because lenders assumed the Germans would be there to support the loans. Even though the German economy was much healthier than Greece’s, their governments could borrow at similar rates–and those rates were low. As a result, Greece could go on a borrowing spree and use the money to run unprofitable government businesses like the national railway, to pay generous pensions to retired government employees and to ignore nationwide tax evasion.
Now, Greece knows it has to cut the public payroll. A recent Bloomberg article tells us that they are using incentives to encourage retirement and also placing people on 75% pay if they receive a poor evaluation or disciplinary action. However, as one IMF official told Michael Lewis, “I’m all for reducing the number of public-sector employees. But how do you do that if you don’t know how many there are to start with?” (from Boomerang, p. 79).
And finally–why do the Germans and French care about Greek math? Here we have reality. German and French banks hold Greek debt.
For an excellent video from the St. Louis Fed on “The Greek Tragedy,” I recommend this YouTube video and all others from the series. And this Washington Post book review tells more about Michael Lewis’s financial disaster tourism in Boomerang.
Posted by: adminEcon
Tags: Angela Merkel, default, early retirement, eurozone, France, French banks, German banks, Germany, Greece, Michael Lewis, pensions, PIIGs, President Hollande, selling islands, sovereign debt, tax evasion
With a March 20 deadline approaching, new European bailout negotiations continue to emphasize austerity. Curious about what austerity specifically meant, I looked at a Greek newspaper.
In the sports section, they discussed the plight of Greece and the Olympics. Athens Olympic Park, home of the 2004 games, is in a state of decay. Greek gymnasts, weightlifters and the water polo and sailing teams have not been able to afford the trip to qualifying competitions. Half the size of its 2008 Beijing counterpart, the Greek Olympic team is coping with funding that has diminished “to a trickle.”
Articles focusing on labor describe a 20% unemployment rate that is close to 50% for people under 25. Mandating a 22% decline in the minimum wage, a new bailout package would initiate a ripple of wage decreases. Social security contributions would be less and unemployment benefits would have to sink below the new minimum wage to preserve the incentive to work. At state-owned firms, long-term employment would no longer be guaranteed.
Meanwhile, consumers, businesses and banks have been affected by the effort to increase tax revenue and diminish tax evasion. Yes, property tax revenue did triple when the obligation was included on electricity bills. However, the attempt to collect unpaid taxes has had a 1% success rate. To generate more revenue, other bailout proposals suggest eliminating the special tax status of people living in the eastern Aegean Islands and those who live on islands with fewer than 3100 residents. Also, a single value added tax (VAT) rate of approximately 20% might be imposed that would result in higher prices for such items as food, drugs, electricity and taxi rides. As for the impact on the banking system, more taxes have meant lower bank deposits as the money travels to state coffers.
I did discover that the Greek government is actually expanding hiring in one area by doubling the number of tax auditors to a total of 2,000.
The Economic Lesson
Governments borrow money by selling bonds. Called sovereign debt, government bonds can be purchased by national and local governments, by businesses (including banks) and by individuals.
An Economic Question: If Greece cannot repay its bonds (loans) that are due on March 20, how might banks be affected?
Having added property taxes to electric bills, the Greek government is shutting off the power to people who do not pay what they owe.
- In a northern suburb of Athens, a mayor has assembled a group of electricians to reconnect people who lose their power. He has also made municipal attorneys available to defend tax “scofflaws.”
- The annual tax obligations of one 86 year old man more than tripled. But he might not get any more bills because unions are occupying the power company’s billing center.
- While government ministries still owe the power company more than $135 million euros, there are no plans to cut off their electricity. So, union workers shut down the Health Ministry’s power for 4 hours.
- Sales of generators have risen.
- Out of the 16,974 pools that satellite photos revealed in one affluent Greek suburb, only 324 homeowners declared them on a tax form.
The bottom line? Yes, these are random stories that might or might not be entirely accurate. However, with the Greek GDP cascading, the euro zone faces a gargantuan and perhaps unsolvable fiscal challenge.
Here is Merle Hazard’s “Greek Debt Song.”
The Economic Lesson
Off the books transactions that sidestep taxation compose a shadow or underground economy. For Italy, the shadow economy is estimated to total close to 20% of all economy activity while for Greece, maybe even 30%. In the US, 8% is the number that has been cited.
An Economic Question: Some say higher taxes solve a fiscal crisis by increasing government revenue while others believe that by discouraging business activity, they diminish revenue. Your opinion?